By Spencer Jakab

Ask your broker about healthcare fund. Do not buy healthcare fund if you are allergic to any of its ingredients. Side effects may include disorientation, depression and sudden loss of money.

After a rough stretch, some investors were prepared to ignore the warning label and bet on the beaten-down sector this year. For example, asset manager Janus Henderson pointed out in January that an index of health stocks had trailed the S&P 500 by an unprecedented 53 percentage points over two years and looked "deeply undervalued."

If you liked them then, you'll love them now-especially big pharma stocks that mostly missed the obesity-drug boom. Pfizer, Merck and Bristol Myers Squibb trade at an average multiple of just 8 times this year's projected earnings and a dividend yield of 5.5%. Eli Lilly, which makes Zepbound, isn't quite as svelte at 33 times earnings, but even it has trailed the market this year.

Investors could do worse than closing their eyes and raising exposure to any out-of-favor sector, betting it'll revert to the mean. Sometimes it won't, though.

Those with their eyes open can read plenty of frightening headlines about health stocks. On Friday, for example, Pfizer shares fell 4% after a report that U.S. health officials plan to link child deaths to Covid-19 vaccines.

Pharma and biotech stocks' woes predate Robert F. Kennedy Jr.'s cabinet appointment. The 2022 Inflation Reduction Act allowed Medicare to negotiate the prices of some of the industry's most lucrative drugs.

A looming patent cliff that will see many blockbusters opened to competition might be an even bigger concern, prompting some pricey acquisitions. For example, Pfizer, flush with vaccine cash, paid a whopping $43 billion for cancer specialist Seagen in 2023. Investors need to be prepared for bold deals like this to fall flat.

Among the most popular ways for U.S. investors to gain broad access to health stocks is through the Health Care Select SPDR ETF. It provides exposure not only to beaten-down drug, biotech and medical-device stocks but also to insurers like UnitedHealth with their own issues-medical-cost inflation, Medicaid funding cuts and legal peril.

The sector has been depressed before. It recovered from slumps 25 and 15 years ago when an earlier patent cliff and Obamacare, respectively, spooked investors. Someone who invested in the ETF at the start of the century had, until April, not only outperformed the broad market but also an S&P 500 tech-stock ETF.

Today, though, it looks cheap mainly relative to a richly valued U.S. market. The health ETF sports a moderate premium to its historical average on trailing earnings, so investors are being compensated less for today's risks.

Investors expecting healthcare stocks to work their old magic need to read another industry's standard boilerplate warning:

"Past performance is no guarantee of future results."

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

September 15, 2025 06:55 ET (10:55 GMT)

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